Financial crisis to cost $7.6 trillion by 2018

RonaldD. Orol

WASHINGTON (MarketWatch) — The near-collapse of the financial system and the resulting economic crisis caused a “conservatively” estimated $7.6 trillion in losses of gross domestic product between 2008 and 2018, according to a study released Wednesday by the advocacy group Better Markets.

An additional estimated $5.2 trillion in GDP would have been lost but was prevented by “extraordinary fiscal and monetary-policy actions,” Better Markets said.

The report was produced to coincide with the four-year anniversary of the failure of Lehman Brothers Holdings Inc., which went bankrupt on Sept. 15, 2008 and drove an expanding credit crunch into a full-blown financial crisis.

Better Markets is a nonprofit, nonpartisan organization based in Washington that bills itself as a Wall Street watchdog. It estimated the avoided GDP losses based on a model produced by economists Alan Blinder and Mark Zandi in July 2010. The economists found that $6.9 trillion in GDP would have been lost if there had not been a policy response. Better Markets cut $1.7 trillion out of that estimate by employing more current data in the survey.

However, Better Markets argues that the combined $12.8 trillion estimated in actual and avoided losses was a conservative estimate, not including many unquantifiable costs inflicted on American people such as human suffering that accompanies unemployment, home foreclosures and other severe economic disruptions.

“There are perhaps tens of millions of Americans who will never regain their earnings, educations, skills and training that they lost,” the group’s report said.

Better Markets added that the actual and avoided costs of the crisis fall into a variety of categories, including spikes in unemployment, government bailouts and other support. It warned that the financial crisis left the United States with “less fiscal capacity” to deal with future downturns or economic emergencies because it significantly hiked government debt.

Dennis Kelleher, president of Better Markets, told MarketWatch that the stimulus packages implemented in response to the crisis all contributed to GDP growth. He said the cost of a major spike in unemployment resulted in real costs to the economy, including extensions of unemployment insurance and lost productivity.

“If they had been employed in October 2009, they would have produced many things and contributed to GDP,” Kelleher added.

In addition to difficulties measuring the cost of the crisis, many of the benefits of regulation aren’t quantifiable, he noted. “It’s like the crime that isn’t committed because of deterrence. How do you quantify the benefit of markets that have no fraud? Or the benefit of investor confidence that causes people to put money in the markets? That is worth an infinite amount. How do you quantify that? You can’t quantify that.”

Kelleher also said that the fiscal and monetary-policy response helped the United States avoid having another 1930s-style Great Depression and that it is difficult to quantify the benefits of avoiding that scenario.

Pushing back on Dodd-Frank pushback

Better Markets’ Kelleher also took issue with an effort by some Republicans, business groups and a court decision to press regulators implementing the crisis-reform Dodd-Frank Act into doing a better job of conducting a cost-benefit analysis when developing regulations.

“They are not advocating for a proper full weighing of the costs and benefits. It’s purely a weapon to kill financial reform,” he commented. “They never examine the costs to the public or the benefits to the public of financial reform. That is never part of the discussion.”

The group’s report notes that home values fell 34% from their peak in 2006 through 2011, representing a $7 trillion loss in homeowner equity, while 3.7 million homes have been lost to foreclosure since the crisis began.

The study comes a day after the International Monetary Fund published a report seeking to estimate the costs of regulations adopted in response to the financial crisis of 2008. It argued that those rules will likely modestly increase lending rates in the United States, Europe and Japan with relatively small economic effects.

According to the report, “Estimating the Costs of Financial Regulation,” average bank-lending rates are likely to increase by 28 basis points or 0.28 percentage points in the United States, in response to estimated rise in regulatory costs. Average bank-lending rates are expected to rise by 17 basis points in Europe and 8 basis points in Japan. Read about the IMF study on the impact of crisis-response rules on lending rates.

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